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Don Graham. Photo credit: Nancy Andrews/Washington Post/Getty images

This story appears in the 2/27/12 issue of FORBES.

In the next few months Facebook will go public at a rumored valuation of up to $100 billion, one of the most keenly anticipated business events ever. The instant that trading opens, Mark Zuckerberg and a handful of his cofounders and earliest backers will reap billions in new paper wealth. And leaders of the Washington Post Co. will watch, melancholy, knowing that their many pressing financial problems could have been magically solved with the ringing of that bell.

In early 2005 Chairman and CEO Donald E. Graham, tipped off to the then embryonic social networking site by an employee whose daughter was at Harvard, approached Zuckerberg about making an equity investment. Within days the two had a handshake deal for a $6 million infusion. But when Silicon Valley venture firm Accel Partners offered to buy in at a higher valuation, Zuckerberg got cold feet. Graham could have pressed him to honor his verbal contract or at least made a counteroffer. Instead, he encouraged the 20-year-old to follow his heart. Zuckerberg went with Accel.

To those who know him, this anecdote, related in The Facebook Effect (Simon & Schuster, 2010) by FORBES contributor David Kirkpatrick, is classic Don Graham. “He’s an incredibly nice person,” says Goli Sheikholeslami, a former Post vice president who headed up digital development at the paper before leaving in 2010. “He’s always willing to give advice, especially to young businesspeople.” “He’s sort of an amazing human being,” adds a former business-side lieutenant. “A lovely, lovely man,” echoes a former News­week editor.

In fact, throughout the newspaper industry Graham, 66, enjoys a reputation as one of the good guys of American journalism, the rare mogul who puts principles and people ahead of profits.
In the 20 years since he took over the CEO title from his mother, the legendary Katharine Graham, the Post has won 32 Pulitzer Prizes, more than any other paper except the New York Times. As papers across the country slashed payroll in the face of tumbling readership and advertising, the Post managed its own downsizing largely through generous buyouts. At a time when cost-cutting pressure has pitted management against labor in newsrooms everywhere, Graham is regarded by his employees as a benevolent figure, a throwback to an earlier era of corporate paternalism. “From my point of view he’s been an absolutely model media owner,” says Jacob Weisberg, ­editor-in-chief of the Slate Group, a part of the digital publishing division. “Don never tells you what to do. He’s been a huge supporter.”

Graham’s Dudley Do-Right attitude, however, has proved a liability lately. The woes of the company’s namesake newspaper—circulation has steadily dropped 40%, to 507,000, since 1995 and revenue 30%, to $680 million, just in the past five years—might have been predictable given the battered state of the newspaper industry. But missed opportunities (Politico, in addition to Facebook) and misplaced loyalties (Newsweek) abound. And, more ominously, Graham’s diversification forays, into everything from education services to new media, failed to pan out—or, worse, turned into millstones.

In the most recent quarter the Post, which also operates a cable system and a string of TV stations, turned in “the worst performance of any of the public newspaper companies,” according to analyst Ken Doctor. After rising steadily for more than a decade the Post Co.’s overall revenues fell 10%, to $3.15 billion, through the first three quarters of 2011. Profits dropped 72% to $55 million. Twice last year Standard & Poor’s downgraded its debt rating, citing profitability concerns. Its stock price has fallen from an alltime high of $942 per share in December 2004—weeks before Graham’s fateful conversation with Zuckerberg—to under $400. Its current market cap is $3 billion.

If he’d played hardball (or even just asked Zuckerberg to honor their agreement or let him co-invest with Accel), none of this would matter. That stake in Facebook it doesn’t own? It could be worth $7 billion, according to PrivCo, a firm that tracks private companies.